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FOMC Minutes: What Could Jolt the Markets?

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The dollar is set to have a busy week to start the new year. The second day of trading includes ISM manufacturing data, JOLTs report and the minutes from the last FOMC meeting. The latter has perhaps the largest potential to shake up the markets. But the conditions are set up for a shift in market sentiment that could drive the dollar.

December was a positive month for risk appetite, which naturally weighed on the greenback. The Dow printed a new record high, and the S&P 500 got within 9 points of beating its all time record. Interestingly, that record was set on Jan 3, 2022. Tomorrow that pattern might repeat. More optimistic traders might hope for the Santa rally to keep going.

What to Look Out For

The issue for the dollar at the moment is that there have been nine consecutive weeks of risk-on. That’s fairly rare, and the last time that happened was way back in 2004. That means there is a higher chance of a correction in the midst of a data dump. Typically, markets reverse their holiday optimism in the first week of the year as well. The question is what could be the catalyst.

The markets have taken on a particularly dovish view of the Fed lately. After the FOMC decided to leave rates unchanged last month, the accompanying statement showed an expected three rate cuts over the course of the coming year. Fed Chair Jerome Powell’s post rate decision speech was seen as dovish, as well. That helped support the market pricing in as many as six rate hikes next year. Subsequently US yields fell, the stock market popped and the dollar took a beating.

Where Things Could Change

The market has a habit of getting overly optimistic about how dovish the Fed will be, and the minutes of the last meeting might prove to be a dose of reality. Investors seem to have been discounting the post rate decision comments from FOMC member Austan Goolsbee, who warned that there was too much pricing in of rate cuts. He will be rotating off the FOMC next year, which could explain why his comments weren’t as hard-hitting. On the other hand, he’s perceived to be the most dovish member of the Fed. And if the most dovish member is saying the market is being too dovish, there might be something to it.

Therefore, the risk of a surprise from the FOMC minutes is likely on the hawkish side, since the market is already full-on dovish. It’s hard to see how the Fed could suggest anything more easing than what the market has already priced in. But there are plenty of things the Fed could do to generate a more hawkish perception, such as insisting on there being more work to be done to get inflation down. Or focusing on tightness in the jobs market, which is particularly relevant in light of the NFP coming out at the end of the week.

The minutes also likely have to be taken into context. The perception of the Fed being more dovish is based on the idea that the US will have a soft landing. That is, job creation is slowing along with the economy. But a beat in ISM manufacturing, especially combined with a surprise upside in the number of job openings in the JOLTs number could give the hawkish argument a boost. And that in turn could get the greenback pushing higher again.

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